The right apartment value calculator can help determine whether STR loans are necessary to get started on a rental property business or not.
When you start a rental business, you need to do the math properly to see if you can afford the purchase and if the property will give you a good return on your investment. You also need to know if an STR loan is needed to acquire the property you’re considering.
Table of Contents
- What Are STR Loans?
- Why Do Investors Seek Out STR Loans?
- Company #1: KRAM Capital
- Company #2: Tidal Loans
- Company #3: Intrust Funding
- Company #4: theLender
- Company #5: Modern Lending
- Company #6: Socotra Capital
- How to Find a Profitable STR Property
A rental property business is a good passive income source that can give you a positive cash flow monthly. However, as financially rewarding as it is, it will also cost you a pretty penny. From the initial investment to carrying out some repairs and updates to operating costs, rental properties can be very expensive to maintain.
However, not all investors are able to finance their dream investment projects. For this reason, many investors look to loans to help them purchase investment properties so they can start building their businesses. While most investors use conventional mortgages, some go out of their way to find loans for short term rental properties.
In this article, we will talk about STR loans and which lending companies offer them. We will also offer some tips, as well as the right tools (like an apartment value calculator) to help get you started on your investment journey.
Related: 3 Housing Markets Where Investors Can Earn Positive Cash Flow With Airbnb in 2023
What Are STR Loans?
STR loans, or short term rental loans, are financing alternatives that help real estate investors purchase income properties to be used as short term rentals. STR loans come in different forms, such as:
Private loans are granted to individuals by private institutions, such as banks, state-based organizations, or credit unions. The loans come with specific terms and conditions set by the lending institution. Private loans may also be granted by individual investors who use their own money and do not charge any points or origination fees.
Hard Money Loans
Hard money loans, on the other hand, are approved and given by private lending companies that charge points and get their funds from other investors. Such lenders typically come with flexible guidelines but higher interest rates compared to other lenders. Payment terms usually take between one and three years to complete.
Conventional Bank Loans
If you’re earning enough money to pay for an additional mortgage on top of your primary one, then a conventional bank loan might be the right one for you. Such loans offer the lowest interest in the market, which might be good for you if you’re not buying multiple investment properties. However, if you’re in the market for several vacation rentals, consider looking elsewhere.
Debt-Service Coverage Ratio Loans
A debt-service coverage ratio (DSCR) loan is typically used to cover repairs or upgrades on a rental property. It also works as a mortgage for purchasing a potential investment property, albeit with stricter requirements. Qualifying for a DSCR loan will depend on your property’s net operating income and the debt you’re willing to take on.
Related: What Is NOI in Real Estate?
Why Do Investors Seek Out STR Loans?
Real estate investors typically look for STR loans for different reasons. Some of the most common reasons are:
To Purchase an Investment Property
Typically, investors seek out lenders who can provide STR loans so they can buy income properties for sale. We’re all aware of how much it costs to buy real estate. Even undervalued properties will cost you a significant amount of money, especially if you intend to use it as a rental property.
To Take Out Equity
Much like home equity or home equity line of credit (HELOC), investors look at STR loans to borrow money based on their property’s equity. Some of the best types of STR loans for taking out equity include home equity loans, HELOCs, and cash-out refinancing.
To Renovate and Update a Property
Investors can apply for STR loans to carry out necessary repair and maintenance work or property updates to their existing vacation rental properties. On average, it will cost you about $15,000 to $200,000 to renovate a property. The amount, of course, is subject to how much work needs to be done. The best loans for renovations are DSCR and home equity loans.
To Furnish a Rental Property
An investor with a real estate investment, specifically an STR property, can take out STR loans to refurbish and furnish it. On average, it will cost you around $20,000 to $50,000 to furnish an Airbnb property. If you just bought a property and want to start a rental property business to list on Airbnb, Vrbo, and other platforms, you can use a DSCR or home equity loan to furnish it.
To Cover Operating Costs
On several occasions, investors also take out STR loans to help them cover their business’ operating expenses. However, if you take out a loan for such reason, it heavily implies that your rental income isn’t enough to cover your monthly costs. It means that you’re spending more than what you’re making. Still, HELOCs are the best loans for this purpose.
Company #1: KRAM Capital
KRAM Capital is one of the top independent lending companies for commercial and real estate loans. On top of multifamily and bridge loans, the company also offers financing for short term rentals to real estate investors.
The lending firm makes a dedicated short term rental financing program available for all US markets except for Nevada, North Dakota, and South Carolina. It offers a sizable loan range of $200,000 to $300,000 to investors who want to invest in short term rental properties. Property types that qualify for KRAM Capital loans include:
- Single-family homes
Investors can choose between fixed and adjustable rate options for their loans under different term durations.
Company #2: Tidal Loans
Another good STR loan option for investors like you is Tidal Loans. The lending company offers individuals different loans like hard money loans, as well as investment property loans.
The company offers investors loans of anywhere between $75,000 and $2,000,000, depending on your needs. The amount covers up to four units. If you want to invest in multifamily properties with at least five units, you can get a maximum of $5,000,000.
Interest rates start at 3.5% and can either be fixed or adjustable rates with no need for income verification. The only downside is that only LLCs, LPs, and corporations qualify for loans for buying or refinancing investment properties.
Although they mostly operate nationwide, their services are not available in the following states:
- North Dakota
- South Dakota
Company #3: Intrust Funding
As a lending company, Intrust Funding provides business and STR loans to individuals in the form of hard money lending. One of its main selling points for real estate investors is that they require properties to be non-owner-occupied. In short, they provide loans for 100% short term rental properties.
It gives investors one less thing to worry about, especially if they intend to invest in several vacation rental properties. Other than being compelled to deal with different short term rental regulations, investors must also deal with strict lending requirements that properties need to be owner-occupied.
Intrust Funding offers some sort of flexibility for the duration of the loan but typically, most loans go from five to 12 months. Loan amounts can reach up to 90% of the property’s after-repair value and can be used to either purchase an income property or work on rehabilitation and upgrades.
Company #4: theLender
theLender is another one of the top companies that offer real estate investors loans for STRs in California and throughout the US. It provides special financing options for vacation rentals from $100,000 up to $3,500,000 in coverage.
At the time of writing, theLender’s interest rates go between 7.125% and 9.75%. Investors can also choose between fixed and adjustable rates. They may also use their short term rental income to qualify for the firm’s DSCR loans.
The great thing is that individuals, corporations, LLCs, and trusts can qualify for the company’s STR loans, whether for property purchase or refinance.
However, one of the downsides of dealing with the firm is supposedly its lack of urgency in dealing with customers. While there aren’t that many, most of the negative reviews tread along such lines. Its current TrustPilot rating is only 2.6 stars out of 5. It means you get a roughly 50-50 chance of success when dealing with them.
On the other hand, a lot of people also give the company praises for its programs and customer service. Just do your due diligence before making a decision.
Company #5: Modern Lending
Real estate investors looking for a good lending company to deal with for STR loans might find Modern Lending to be a good option.
It offers specialized packages for new and seasoned investors, including a 15% down payment for first-time STR property buyers. Succeeding investment properties will require a 20% down payment with a limit of 10 properties per owner or host.
One of the company’s selling points is that it provides pre-approved investors with a detailed short term rental analysis of their location, which includes the following:
- Estimated profit potential
- A-F market rating
- Estimated occupancy rates based on historical data
- Monthly rent calendar
The company’s requirements for loan applications are very reasonable. Applicants should demonstrate at least a 680 credit score and a debt-to-income ratio of 50% or less.
Company #6: Socotra Capital
Last but not least, there’s Socotra Capital. Socotra is one of the lending companies that do not hesitate to make loans for investors looking to buy short term rental properties. It recognizes the vast income-generating potential of vacation rentals and wants to help people looking to boost their income to make ends meet.
The company’s hard money loans provide relief to applicants who are either burned out or bummed out by other lenders’ requirements and restrictions. It offers STR loans to investors looking to buy in any real estate market in top Airbnb locations, especially along the Atlantic and Pacific Coasts.
However, Socotra Capital does not provide much information on their terms and requirements so if you’re interested, you will need to reach out to them online. At the time of writing, Socotra Capital’s loan sizes go anywhere between $500,000 and $5,000,000.
Related: How to Get the Best Mortgage Rate for Investment Property in 2023
How to Find a Profitable STR Property
We already gave you a list of some of the best lending companies that offer STR loans. However, even if you can snag the best deal on a loan, it will not matter if you don’t secure a profitable short term rental property to help pay off your loan.
We already discussed the different reasons investors seek out STR loans. You don’t want to get to the point where you’re seeking out a loan to help you cover your monthly operating expenses. That’s just a bad business model. Instead, you should look for a property that will give you substantial revenue whenever you use your apartment value calculator.
For this reason, you need to know how to find the best property in the most profitable short term rental markets. Here are three simple yet effective ways to do it:
1. Write Down a Set of Clear Goals
Goal setting is important to the success of any endeavor worth getting into. As a real estate investor, you need to come up with a clear set of goals so you can track your progress.
Ideally, your investment goals should be SMART. They need to be:
- Specific. You need to have very specific goals in mind. You cannot be vague about them and simply say, “I want to make money.” Instead, you can say, “I want to make $2,000 in monthly rental income.” You need to have specific figures and items in mind when you set goals so you have a target to hit.
- Measurable. Additionally, you should set goals that you can easily keep track of. Saying, “I want to own an investment property” is open-ended and will not prompt you to move any time soon. However, changing your narrative by saying, “I want to own an investment property in 12 months” makes it more tangible and possible as it gives you a sense of urgency to move.
- Achievable. Next, they must be achievable. You need to set goals that are within your control. For instance, we all want to be millionaires, but simply saying that defeats the purpose of setting a goal. Your goals should both be big enough but grounded to be accomplished within a reasonable timeframe.
- Relevant. Your investment goals should always align with your values and long-term goals in life. Whenever you think you’re getting sidetracked, this will help put you back on track.
- Timely. Lastly, your goals should fall within a reasonable timeframe that will allow you to prioritize and set order for your affairs.
2. Do Your Due Diligence
Next, it is very important to do your homework when it comes to real estate investing. It is not something you should take lightly. Real estate investing involves a lot of money. That’s why you’re looking for a STR loan to begin with. You wouldn’t want all that money to go to waste just because you failed to perform due diligence.
As an investor, you need to do thorough research on potential rental markets. You need to ensure that a market will help you achieve your investment goals. It requires some digging on your part.
Fortunately, real estate website Mashvisor can help you cut down on precious research time. Mashvisor’s subscribers can access a massive database covering nearly every rental market in the US. It gathers data from highly reliable sources like Realtor.com, RedFin, the MLS, and Airbnb so you can analyze markets and income properties with greater confidence.
Mashvisor’s Market Finder will let you see an overview of a particular area and what each neighborhood has to offer by way of revenue. You can easily compare multiple real estate markets to see which of them can give you the best rental income, cash on cash return, and occupancy rates.
Additionally, the Market Finder tool gives you other essential short term rental data needed to make a highly accurate and realistic neighborhood analysis so you can make an informed decision.
Related: Find High-Income Properties for Maximum Returns
3. Make Sure the Math Checks Out
Lastly, as an investor, you need to make sure all the numbers add up to give you a positive cash flow on your vacation rental property.
Working on numbers can often be confusing and frustrating but the thing is, you can always turn to online apartment value calculators. Fortunately, Mashvisor also has an investment property calculator that you can use to crunch the numbers to see if a property is worth investing in or not.
Mashvisor’s calculator also functions as an Airbnb and mortgage calculator to ensure you get the right numbers before you make any decisions.
One thing that separates Mashvisor from other investment platforms is its Dynamic Pricing tool. It runs just like Airbnb’s smart pricing but it allows you to link your rental properties under one platform. It makes property management easier and more efficient.
The tool lets you set reasonable and competitive prices. It is powered by intelligent AI, which taps into the site’s massive database so you can set the best rates that will attract guests all year round.
We cannot stress enough how important it is to set the right nightly rates, as it will spell the difference between profit and loss. It will allow you to manage your rental well and grow your business.
Get access to Mashvisor’s Market Finder, Dynamic Pricing, and other tools to get you on your way to a thriving real estate investing career. Get started on your 7-day free trial today.
Wrapping It Up
To end, companies that offer STR loans are many but there are certain noteworthy lenders that are worth checking out. The companies mentioned in this article are only a few of many so if you’re in a location that doesn’t offer their services, you can always go to other equally credible lenders. You’ll just need to do a bit of research.
And speaking of research, if you’re in the market for STRs to buy investment properties, you need to ensure that the market you’re considering will give you a good return on investment. This is where you need to exert a little bit of effort. Due diligence should never be neglected. Even if you can find an affordable property, it won’t do you any good if it’s in a bad market.
For this reason, more than just an apartment value calculator, you need to have the right investment tools with you–tools that Mashvisor can provide. Mashvisor’s Market Finder lets you see which markets are worth investing in, and its Dynamic Pricing tool lets you automate your price setting to stay competitive in the market.
If you need help in analyzing the profitability of certain investment properties, schedule a demo with Mashvisor today to get access to the best real estate data and tools.